Foglesong v. Commissioner

621 F.2d 865 (7th Cir. 1980)

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Nature of the Case

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Facts

Foglesong (P) was a sales rep for Plymouth Tube and for Pittsburgh Tube. They both manufactured cold drawn steel tubing. On August 30, 1966, he incorporated his business and he and his wife and his accountant were listed as the incorporators. P held 98 shares of stock, and his wife and accountant held 1 share each. The Corporation paid no dividends during the tax years in question. Preferred stock was also issued to the children of P for a subscription price of $400. The four children got $32,000 in dividends over the three years in question. P got his first salary payment on January 9, 1967, and after that got a regular monthly salary. P reported no personal income from any business as a sole proprietor. After the formation of the Corporation, all commissions were paid to the Corporation, but written agreements to that effect were not executed until 2 and 3 years later. P claimed that he wanted the limited liability of the corporate structure and wanted a vehicle for expansion into several new business ventures. Subsequent to formation, P did interview a salesman for the New England Area, but that was unsuccessful. The Corporation did employ a secretary during the taxable years and paid her a salary. P asserted that he had unsuccessfully attempted to expand his sales business into other areas, but he could produce no documentation of those efforts. The Corporation maintained all the formalities of the structure, but P had no written agreement with the Corporation nor did he enter into a covenant not to compete with the Corporation. P’s only gainful activity was as an employee of the Corporation. The Tax Court held that tax avoidance considerations far outweighed any genuine business concerns even though there was no attempt to form a corporation to take advantage of losses incurred by a separate trade or business. Even so, the Commissioner conceded that the Tax Court found that the Corporation was a viable, taxable entity and not a sham. But despite these findings, the Tax Court disregarded the Corporation for tax purposes. It found that P had 98% control and the income was taxable to P. This was based on section 61 and the assignment of income doctrine of Lucas. As for exclusive territorial rights commissions assigned to the Corporation, the Tax Court held that the Corporation and not the taxpayer was the party earning the income. There was no decision on allocation to P under 482.